world wide wednesdays :: who's going broke this week?

there's been a lot of talk about greece and their debt crisis/ bailout/ austerity measures in recent months. we've talked about it a couple of times here. while things are from settled in the land of the olympics, aristotle and ouzo, they're hardly the only country teetering on the brink of economic catastrophe. nor is the problem limited to the eurozone, or to the developing world, or to anywhere. indeed, economic ruin is probably hanging over your head like the proverbial sword of damacles right now, judging from where most readers of this blog seem to come from. [you mean "earth" -ed.]
it turns out, huge parts of the world are absolutely drowning in debt and that their size and growth rate of their economy proportional to their debt pretty much guarantees that they are never going to be able to pay anything like the total amounts they have owing, no matter what they do. so the questions you're likely asking right now are: 1. who are these deadbeats? and 2. how fucked am i personally?

allow me to play tour guide in the theme park of financial ruin...

armenia, pictured with its debt in the background

armenia :: this country just never seems to get a break. subject to genocide by the turks at the beginning of the century, held under soviet rule until 1991, at war with neighbouring azerbaijan and bowled over by the 2008 global financial crisis, it's sort of amazing that armenians haven't just packed up and volunteered to be the first country to resettle to another planet. and signs indicate that it's about to get worse.

following
the 2008-09 crisis, armenia's fragile economy was hard hit by falling
commodity prices and increased borrowing costs. their exports plunged
and their gross domestic product contracted. to stave off disaster, the
country was forced to borrow more and still needed almost $2 billion in
aid in order to remain solvent. unfortunately, that meant that the
country's foreign debt more than doubled in a single year and the ratio
of debt to gdp rose from around 13.5% pre-crisis to about 50% by 2012
[although it was down to 41% by 2014]. that sort of debt ratio is
thought to be manageable, if economic growth is no lower than 7-8% per
year. unfortunately, armenia's economy contracted sharply as demands for
its products fell, industrial output fell, which raised the rates of
unemployment and poverty, which decreased tax revenues, which meant that
private foreign investment stopped coming in... and in the midst of all
this, the armenian government was forced to put its greatest financial
effort into servicing the debt that it had accumulated while trying to
get out of the financial crisis other people created. [side note :: in what might be the ultimate example of economic
unfairness, armenia was able to weather the 2008 "liquidity crisis"
with relative ease, because its banking system wasn't closely connected
with the global system that imploded.
armenia's pain came from the period just after, when the world's
largest economies were trying to get their house in order. turns out
that getting their house in order involved foreclosing on armenia's
house.]

in 2009, armenia was encouraged to keep spending in order to provide a stimulus for the economy. however, since that met with tepid response, the government now
finds itself more indebted than ever and with very little prospect for
improvement. the country had traditionally been able to rely on its
large and often wealthy community in diaspora to help with investment [i
can pretty much guarantee that you know the name of at least one of the
families involved], however, since the country now looks like such a
risk, even that money has dried up. by the end of 2015, armenia will
have approximately $4.9 billion of debt and an gdp that's barely 10%
bigger than it was ten years ago. things are looking bleak.

a bridge over deeply troubled waters

italy :: desperately trying to avoid the label of "the new greece", italy can take some encouragement from the fact that its economy grew by 0.3% in the first quarter of 2015. that looks pitiful, and even by the standards of european growth, it's below standard, but it's the best their economy has done in years. italian lawmakers are hooting and high-fiving each other over projections that their economy is projected to grow by a whopping 1.6% in 2016. so with all that good news, is there still any chance that italy could be the next country to hit a financial crisis? oh god yes.

remember what i said about armenia's struggle to keep their head above water with a debt ratio of 40-50% of gdp? italy's debt ratio is 130% of their gdp. if italy were an individual, she'd be forced into bankruptcy, an option which the united nations has been investigating for countries that simply get in too deep. it's going to take much, much more than the meagre growth italy's shown so far to start balancing off that debt and remember, it doesn't have the same control over its financial affairs it would if it were acting on its own; it's forced into lock-step with the rest of the european union and we see how well that's worked out for greece. [side note :: it's unlikely that italy would be allowed to fall to greece's level, since their economy is so much larger that it could destabilize the entire eurozone if it were forced into default. ironically, italy may be benefiting from greece's economic misery, since the downward pressure it's created on the euro makes exports from other european countries, like italy, more affordable to international markets.]

italy has massive unemployment, especially among young people [the national unemployment rate is just over 13%, but among young people, it's 43%] and about a quarter of the population lives below the poverty line. prime minister matteo renzi has passed some reforms to make it easier and more appealing for companies to hire new employees, by stripping away job security protections for those that are already employed and offering financial incentives to companies for new hires. that has produced short-term growth, but the with the incentives expiring in the near future and much of the population less secure in their jobs than before [and hence less inclined to spend what money they have], it remains to be seen whether the improvements are anomalous.

the biggest areas of vulnerability may be out of italy's control. if the greek crisis continues, investors are likely to scale back the money they have in the italian economy out of fear of the same sort of thing happening there. and, since italy has benefited from increased trade with russia, the deteriorating state of international relations with vladimir putin and the implementation of sanctions has kind of put a damper on things. so while italy just might possibly be starting to begin to recover from a three-year recession, their financial house of cards could collapse if anyone else in the world sneezes.

moving in the wrong direction

brazil :: a dozen years ago, everyone who knew anything about world economics knew that it was all about "bric". that's brazil- russia- india- china for those so hopelessly unhip to have missed hearing about it. everyone knew that those were the economies where real growth was to be found. if you wanted to make money, that was where you needed to start doing business. but somewhere along the line, things went horribly, horribly wrong and now people are looking at brazil and wondering how things got so royally screwed up.

the tendency of right-leaning economists is to lay the blame on left-wing prime minister dilma rousseff and her government's insistence on micro-managing the country's economy. rousseff drastically increased public spending and public debt during, to be sure, and has been reluctant to take measures to curb high inflation or to make cuts to avoid running a deficit. however, in some cases, the criticism seems a bit specious. for instance, she's been criticized for strictly limiting the profits that private sector companies can make by taking on public projects, because it makes those projects less appealing. however, private-public partnership deals have been targeted by many international economists as dangerous, because of their tendency to disguise public debt. private corporations are given contracts by the government to execute public works projects and in return for the service, the government acts as a guarantor for their investment. because those companies survive by making profits, their costs are usually higher [especially when they subcontract work to others, creating multiple layers of profit within a single project]. the money the government gives to those private corporations and the amount of the corporations' expenses they guarantee both count as government debt, since both are liabilities. however, they are not subject to the same controls as items paid for directly from the budget, which means that things can go wrong very, very quickly. while public-private partnerships are championed by many financial investors [and particularly by the united kingdom, where such partnerships have actually been disastrous], analysts agree that they're probably the worst way for a government to go about its business. all of a sudden, rousseff's insistence on capping profits looks like a much smarter move for her country.

the counter-argument to the "left wing government is destroying the economy" line is that brazil failed to make the right moves during the good times and is now suffering more than it should during the slump. while some may criticize brazil for failing to make service cuts in order to balance its budget, the larger problem is that it did little to alleviate the problems of poverty and its fragile infrastructure when it could have. now, those problems seem huge, because the country doesn't have the money to attend to them, but they've always been huge and the government's greatest failing may be that they didn't work to fix them when it was possible.

corruption is a huge problem in brazil [as it is in italy], which tends to make underwriting large corporate projects [like, say, hosting the world cup and the olympics in quick succession] even more expensive than they would be otherwise. the state-run oil company has been caught up in a corruption scandal which has greatly limited its ability to pursue projects and grow the economy [where it had previously been the largest investor]. and wealth in brazil is highly concentrated, which means that a few people have an inordinate influence on how much money circulates in the economy.

but wait, it gets worse. with interest rates of over 13%, it's extraordinarily difficult for ordinary brazilians to borrow money from standard banks. sensing the imminent bursting of brazil's housing bubble, banks have recently raised the minimum down payment on a house from 20% to 50%, which has driven many to acquire predatory loans at exorbitant rates of interest, fueling a massive private debt crisis which is arguably a bigger issue than government debt. with so much money tied up in loan repayments, and with the government increasing taxes as well as costs for necessities like water and power, there is less and less money available for discretionary spending, or for big ticket items like homes or cars, key indicators of economic health. indeed, consumer confidence is at a ten-year low, which makes it unlikely that brazilians will open up their wallets anytime soon to assist brazil's already contracting economy.

that's just a look at three countries who are currently threatened. there are many more and if you're interested in finding out more about them, as well as reading recommendations on how to deal with the rampant problem of global debt, i highly recommend reading the jubilee debt campaign's report "the new debt trap", which i've used extensively in researching this post. it was just released last month, so it's the freshest information available on the subject. reading it puts in perspective just how vast the debt problem is: it identifies 93 countries that are either experiencing a crisis or on the precipice of one. there are countries at risk on every continent except antarctica and many of them lack the resources needed to pull themselves out of this dangerous cycle.

so the bottom line is: in the absence of some pretty seismic policy shifts, we're all probably screwed and if you live in armenia, italy or brazil, you're just likely to see the results of that screwing a little earlier than the rest of us.

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